Singh Said to Sell Steelmaker at Four-Year Low: Corporate India

India is pressing ahead with its
plan to sell a stake in the biggest state-owned steelmaker in a
race to cap the budget deficit, undeterred by a plunge in the
shares to a four-year low.

The government will offer 10.82 percent of Steel Authority
of India Ltd. (SAIL) on March 20 to raise as much as 35 billion rupees
($639 million), said two officials with direct knowledge of the
matter. Teams comprising officials and bankers left this week on
a nine-day roadshow to market shares in Singapore, Hong Kong,
Tokyo, New York and London, the people said, asking not to be
identified, citing confidentiality terms.

Slowing demand for the alloy in an economy poised to expand
at the slowest pace in a decade and rising input costs have
driven the stock of the New Delhi-based company 32 percent lower
since the end of 2009. Prime Minister Manmohan Singh’s cabinet
has twice deferred the sale in the past two years, believing a
higher price would help narrow the widest budget shortfall among
the biggest emerging economies.

“They ignored better times for the sale when demand was
stronger and competition was weaker,” said Abhisar Jain, an
analyst at Centrum Broking Pvt. in Mumbai, who recommends
selling Steel Authority shares. “The return of those times may
be far away. This smacks of despair.”

Share Slump

Steel Authority shares closed at 68.20 rupees on March 4,
the lowest level since Dec. 5, 2008, according to data compiled
by Bloomberg. They slid 1.9 percent to 69.10 rupees in Mumbai
today, extending this year’s loss to 24 percent, versus no
change in the benchmark S&P BSE Sensex. (SENSEX)

He cut the revenue target from stake sales for the year to
240 billion rupees ($4.4 billion) from an estimated 300 billion
rupees as bureaucratic delays undermined the plan. He said on
Feb. 28 that he will narrow the nation’s budget shortfall to 4.8
percent of gross domestic product next year from an estimated
5.2 percent in the 12 months to March 31.

Piling Inventory

Stockpiles at Steel Authority have increased because of a
dearth of orders from government infrastructure projects, while
competition from Tata Steel Ltd. (TATA), JSW Steel Ltd. (JSTL) and Essar Steel
Ltd. has eroded prices of the alloy. The company had about 1.5
million metric tons of unsold stocks as of Dec. 31, more than
half of the sales in that quarter.

“The inventory pile-up is raising concern the company’s
capacity expansion may get further delayed,” Jain said. “If
Steel Authority is unable to use its existing capacity, there’s
no point expanding.”

India’s steel consumption rose 4.1 percent in the 11 months
ended Feb. 28, according to the steel ministry’s Joint Plant
Committee, half the pace the committee had estimated at the
beginning of the year and slower than the 5.5 percent growth
last fiscal year.

Steel Authority’s profit fell to 4.84 billion rupees in the
three months ended Dec. 31, the lowest in more than nine years,
dragged down by higher staff and raw material costs and a 6
percent drop in average product prices.

Economy Stimulus

Cash reserves fell more than 30 percent to 59 billion
rupees in 2012 from a year earlier amid a decline in earnings
and increase in debt to fund a planned expansion. The board has
advised that reserves be maintained at about 60 billion rupees,
the two people said.

The government’s efforts to kick start the economy and
stimulate demand will help the steelmaker, said Mumbai-based
Umesh Patel, an analyst at KR Choksey Shares and Securities Pvt.
that has a buy equivalent rating for the stock.

Prime Minister Singh’s recent policy steps include opening
the retail and aviation industries to more foreign investment,
easing caps on capital inflows and speeding up infrastructure
projects. Chidambaram’s advisers have said growth will rebound
to 6.7 percent next fiscal year from an estimated 5 percent this
year. That would still be below the past decade’s average of
about 8 percent.

‘Considerable Pain’

“Steel Authority has undergone considerable pain along
with other peers in the sector, but most of the bad news has
been priced in,” Patel said. “The stock is trading at very
attractive valuations and if the government offers a discount,
it will be a compelling opportunity for buyers.”

The company is spending 721 billion rupees to expand crude
steel capacity by 60 percent to 21.4 million tons, build new
iron ore and coal mines and set up new machinery to enhance
productivity. Loans will account for half the spending, the
company said in a presentation last month.

Construction delays, difficulties in getting mining
approvals and resistance from Maoist rebels have hindered the
plan. While raw material supplies are just enough to feed Steel
Authority’s 13.4 million ton capacity spread over five factory
complexes in the country, meeting future requirements of iron
ore may pose a challenge, said Giriraj Daga, an analyst with
Nirmal Bang Equities Pvt. in Mumbai.

Maoist Rebels

The company’s biggest mill in the central state of
Chhattisgarh will run out of iron ore in five years, Chairman
C.S. Verma said in August. It hasn’t been able to develop a new
mine, fearing “violent reprisals” from Maoists.

It had to shut one of its biggest iron ore mines in the
eastern state of Odisha in November after failing to get
environmental approvals. The mine resumed work at 60 percent
capacity about two months later. Another mine in neighboring
Jharkhand has been closed since mid-2011, the people said. Steel
Authority gets all of its iron ore from its own mines and
imports 70 percent of its coking coal.

“The future will be more subdued for Steel Authority as
interest and depreciation costs will offset gains from lower
coking coal prices and higher sales volumes,” said Nirmal
Bang’s Daga, who has a sell recommendation for the stock. “The
company has been dependent on imported coking coal and in a
couple of years its iron ore security may also come under risk
if approvals don’t come fast.”